Other than some noticeable exceptions, such as Norway, the OECD statistics show that corporation tax has been steadily falling for decades and now typically stands at between 5-10% of a country’s total taxation. Although clearly none has contravened any regulation, some prominent multinationals and an increasing number of our UK domiciled companies have been dragged through the press for paying little or no corporation tax in recent years. This has led to the heads of governments meeting at this week’s G8 summit in Northern Ireland with part of the agenda reserved for getting the ball rolling on revising the world’s complex global taxation laws. Times are tight and they need the revenue.
Now as personal taxation on incomes puts three times as much in most nations’ coffers, tightening up on the black economy and squeezing a bit more out of the wealthy might have more effect. But companies are an easier target – they’re anonymous to most of the populace; there are less of them so collection is easier – and they don’t have a vote! The politicians are out to get them and there is a growing political consensus for a unitary tax system where tax is based on a formula that apportions total profits based on factors, such as revenue, assets and number of local employees, that reflect the real economic activity that occurs in each country rather the current legislation which allows multinationals to legally locate the most profitable parts of their businesses in low tax jurisdictions. Under the unitary system that a surprising number of countries are subscribing to, intangibles such as brand royalties are ignored altogether as tax is more closely tied to where economic activity occurs rather than where companies choose to report profit.
Clearly there will be a lot of lobbying and debate before such a system is ever legislated. But if multinationals are to defend today’s tax regulations, many need to arm themselves with more transparent insight into the transfer pricing that underpins their financial reporting so they can have an informed discussion with the regulators and legislators. Exchange rates and other factors come into play when setting transfer prices, but the cost of the goods or service being transferred is the major element. This has led an increasing number of multinationals to adopt an activity-based costing (ABC) approach to their transfer pricing in that it is based on cause and effect relationships that more accurately reflect the resources and costs consumed in producing the goods or service being transferred and gives greater credibility to the transfer price that simple apportionment. Once it is in place, it also means less likelihood of costly tax audits – or so say the experts. Here is Andrew K. Hwang, Managing Director, PwC talking to Karuna Mukherjea, Director, EPM Product Marketing, SAP about what options and solutions are available to improve transfer pricing – and here is Brian Francis, Executive Director at Ernst & Young talking specifically about how they use SAP Profitability and Cost Management in their transfer pricing offering – both clips recorded at SapphireNow last month.